The ACCC will appeal against the Federal Court's rejection
of its attempt to block Metcash's acquisition of the Franklins
supermarket business.

The outcome of the appeal is likely to have a major impact on
the ACCC's approach to future mergers and acquisitions. If
Justice Emmett's view of the correct test is upheld, the ACCC
could face a much tougher challenge in the future in its
consideration of the competition aspects of mergers.

What will the ACCC base its appeal on?

The ACCC has identified two key grounds of appeal:

the Court erred in its approach to market definition by failing
to identify a relevant market for the wholesale supply of packaged
groceries to independent retailers; and

the considerable weight given by the Court to the stated
preferences and intentions of the seller establishes an onerous
test that "would make it an unrealistic task for the ACCC in
future matters to establish what is likely to happen in the market
if a merger doesn't proceed".

According to ACCC Chairman Rod Sims, "If this judgment goes
unchallenged it may entrench the principle that the intentions and
preferences of the seller are critical to deciding how likely it is
that alternative buyers will have a real chance of
success".

In the ACCC's view, this cannot be the correct approach to
establishing what would happen in the absence of the proposed
transaction (that is, the counterfactual).

Why is the counterfactual so significant in merger
analysis?

We are not surprised at the ACCC's decision to appeal on the
second ground concerning the applicable test for the likelihood of
the counterfactual occurring.

The counterfactual is the benchmark against which a merger
proposal is judged by the ACCC. The ACCC must identify the future
state of the market without the acquisition and compare that to the
future state of the market with the acquisition. It is on this
basis that the ACCC undertakes its competition assessment.

In the decision under appeal, Justice Emmett concluded that the
ACCC must establish on the balance of
probabilities "what the future state of the market
will be, both with and without the proposed acquisition. That is,
the Commission must satisfy the Court that its counterfactual is
more probable than any competing hypothesis advanced to suggest
that there is no real chance of competition being substantially
lessened as a result of the acquisition".

This sets a high burden for the ACCC that could have significant
implications for future section 50 merger analyses.

What does this decision mean for future ACCC merger
decisions?

If Justice Emmett's approach is not overturned on appeal,
the ACCC will likely bear a due diligence-style burden to block a
merger on the basis of a potential alternative bidder with fewer
competition concerns:

the balance of probabilities test would likely require the ACCC
to identify credible evidence that the vendor would be willing to
sell to the alternative bidder;

this would likely require the ACCC to at least gather evidence
of the alternative bidder's financial and operational
capability and specifically consider the vendor's stated
intentions; and

the ACCC would also be required to consider whether the
alternative bidder would then be likely to acquire the target and
run it in a way that would offer significantly greater
competition.

This is an evidential burden significantly beyond that required
of the ACCC in establishing its counterfactual as a "real
chance" or a "commercial likelihood" (as per the
real chance test contemplated by Justice French in the AGL
case).

The appeal issue – determining the
'counterfactual' to the merger proposal

The ACCC argues that the correct test is whether a
counterfactual is "sufficiently credible to be more than a
mere possibility, and to assess the likelihood of a substantial
lessening of competition on the basis of that
counterfactual".

If a real chance of a substantial lessening of competition is
the test (consistent with authority and as accepted by Justice
Emmett), it seems to us that adopting a balance of probabilities
test for identifying the relevant counterfactual in the first place
is inconsistent with the relevant thresholds applicable to the
overall competition analysis.

On the other hand, Justice Emmett did consider the ACCC's
argument that the ACCC need only establish a real chance that one
of its counterfactuals would come to pass. Yet, even on that lower
test, he was not persuaded that there was a real chance that the
counterfactuals contended for by the ACCC would come to pass if the
Metcash acquisition did not proceed.

The ACCC may therefore run into difficulties on the facts of the
case, because Justice Emmett found that the rival bidders for
Metcash faced so many difficulties that it was only a matter of
speculation that they would deliver an offer which Franklins'
owners would be likely to accept.

It would nevertheless remain open for the Full Court, even if it
dismisses the ACCC's appeal, to comment on the test as
formulated by Justice Emmett. Any such comments would be
significant for future merger analyses (even if not for the Metcash
proceedings themselves).

Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
Persons listed may not be admitted in all states and
territories.

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